Fake Breakouts ie: Fakeouts

Remember how we talked about three types of breakouts but only focused on two of them? The reason is simple; the third breakout type is fake! Fake things can lead to ugly situations, even in Forex trading. Some breakouts are not real. So what are fake breakouts? These are situations where price briefly moves out of support or resistance zones and retreats to the same zone. Watching a trade disintegrate in front of our eyes can be such a tough swallow, and we are left confused on whether to hold our position or not. None of these decisions are pleasant when you thought you were leaving the market with bread. So, to avoid such situations, we will need to add some rules to our trading plan.

How to Avoid Fakeouts

No one can predict the market 100%, which is why it’s impossible to avoid fakeouts altogether. However, there are certain things you can do to reduce them, and here’s how:

• Take breakout trades after the formation of solid candlesticks: The strength of a candlestick close will tell you whether we are getting a good breakout or not. Remember, there is no money in Forex without volumes. A robust bullish break is indicated by an extended bull bar that closes its high, while an excellent bearish break is identified by a long bear bar that closes near its low. Small candlesticks denote low volume, and you need to be careful with them.

• Stop chasing big ballistic price moves: Have you ever seen a powerful trend with little or no pullback? Steer clear of the market during such times. Don’t follow these breakouts because the price might reverse abruptly, and you’ll undoubtedly burn your finger.

• Use Trend Lines and Moving Averages: Moving averages depict psychological levels in the Forex Market. Ample space between moving averages points to a weak breakout, while a small space between multiple moving averages is a good sign of a strong breakout. Trendlines bring out clear chart patterns and help us notice breakouts more accurately.

Don’t take trades where you lack a proper stop loss logic: – Good stop losses are normally placed at support or resistance levels. Therefore, where the nearest psychological level is far, you would want to avoid taking a trade because the risks could be higher than you think.